For Emerging Markets, Greece Sticks Out as ‘Sore Thumb’

Emerging-market investors are on the lookout for countries with fast growth rates, modest debt burdens and other signs of a promising future.

Greece, some say, is not it.

Some money managers specializing in emerging markets say they’re not rushing to add Greece to their portfolios after index provider MSCI Inc. said late Tuesday it would add the euro-zone nation to its main emerging-market stock index.

“You don’t think of a submerging market like Greece when you think of emerging markets,” says Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management, which advises on assets worth $225 billion. “Greece is a bit of a sore thumb that will stick out in the index.”

Put aside the fact that Greece’s financial problems, which began creeping up in late 2009, set off a chain reaction that ultimately caused investors to question the integrity of the euro zone itself.

After multiple bailouts and a period of calm in Europe’s debt crisis, Greek officials are trying to mend their economy. But Greece still looks sickly compared with countries such as China, Mexico and South Korea.

Countries deemed to be emerging markets by Bank of America-Merrill Lynch are expected to grow an average of 4.9% this year, according to the bank’s analyst. In contract, the International Monetary Fund predicts Greece’s economy will contract by 4.2%.

Last year, developing countries had debt levels that averaged about 35% of gross domestic product, according to the IMF. Greece’s debt-to-GDP level was 159%.

Jay Malikowski, portfolio manager and research analyst at Boston Company Asset Management, which has more than $40 billion under management, says the emerging-market label might end up being better for Greece than for investors.

He estimates that Greece’s stock market could receive inflows of $800 million as a result of the country’s inclusion into the index, which becomes effective in November.

“Would I want it in my portfolio? Probably not now,” Malikowski said. He said he wants to see more deregulation and other economic reforms in Greece before even considering buying shares.

Despite the stark difference between Greece and its fellow emerging markets, there’s a rationale for its inclusion in the index, which is tracked by $1.4 trillion in investments.

The MSCI largely classifies countries based on the size and accessibility of their stock markets. Greece’s stock market had become too small for developed status, with only two companies included by MSCI indices and a weighting of 0.01% on the MSCI World Index. Greek gambling company OPAP S.A. and Hellenic Telecommunications Organization S.A. are the lone Greek companies represented currently.

“It’s not based on whether the economies are in bad shape or not, it’s based on the liquidity of the stock markets,” said Clem Miller, investment strategist with Wilmington Trust Investment Advisors, which has $20 billion under management.

Miller says the funds he invests in likely won’t add Greece either.

“The last few years they have not invested in Greece,” he said. “I would be surprised if they were to start.”